Sunday, November 29, 2009

November 28th Weekend Update

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As always, let's start with the facts ...

GGT price fell from Wednesday's value of $19.38 to $19.21, a drop of nearly 0.9%, on extremely light volume of 692K shares.  Most of the trading floor/buyers/sellers were obviously with their families.  Friday-over-Friday the price of the GGT actually INCREASED $0.05, and because last Friday's reading was the same as the previous Friday's (11/13), we have a situation where we are actually horizontally trending...

If it weren't for the continually falling volume I would be very bullish here; two weeks in the same area on low volume points to a fairly stable environment from which to build.  Since we're not seeing high volume with falling prices we're not seeing dumping of equities -- just the opposite -- everybody is "sitting pat".  Here's the most recent GGT price and volume graph; click on the image for a larger view:



While I'd like to believe that we're all doom and gloom from this point forward, especially with the Dubai bow shot on Thursday, a chart of the GGT Price and EMAs is telling us a different story, at least from this weekend.  Click on the image below for a larger view:




The figure above is telling us that overall, even though we're seeing weakness in the GGT Price, that the four main Fibonacci EMAs (13-22-34-55) are all still "parallel" and pointing upward.  Folks, this is a bullish pattern, and until we get crossings of these from above, there is no other way to interpret this market.  Sure, the market could move lower, but on the time-frames that are indicated by these EMAs, we are still pointing upward.

This next chart is the balance to my statement above, and is probably the most telling of what the medium-to-longer term markets hold, at least from today's perspective.  Click on the chart to enlarge:




The meat of the chart above is shown in the top pane -- here, I plot the change in slope of the 65d EMA of price, viewed from two different perspectives.  The 65d EMA is a well-regarded metric used by the Wall Street Journal to determine the health of a given equity.  In this case, I've taken all of the GGT stocks that were in the database as of today, created an index on each of the stocks, then plotted their EMAs as well as the change in slope of the 65d EMAs

The top pane has two traces -- one is the value of a 5-day best fit of the change in slope of the 65d EMA on price, the other is a 34d best fit.  Obviously, one moves faster than the other, hence why the 5d seems more bumpy.  Use the 5d to get a view on the immediate behavior of the market -- over the last week, and use the 34d to get a better understanding of the longer-side of the market.  Since there are about 4800 stocks in this index, you're looking at a good slide of the tradeable marketplace.

The first thing that should be apparent to you is that since 10/21 or so, the market has been decelerating in terms of price appreciation as a whole.  I've drawn a downward-sloping line showing that this deceleration has been relatively linear, and I see no reason why this would reverse in the near term.  Hence, prices are undergoing significant slowing of price appreciation, and until we see this longer-term indicator (34d fit of the change in 65d price EMA) turn up, I think that the writing is on the intermediate-to-long-term wall.

The next thing that should be apparent is that the 5d fit of the 65d EMA line is struggling to make the highs it saw a month ago, let alone several months ago.  I'll show below that this is due to the disconnect between the performance of the large cap and small cap stocks -- around the middle of October, small-caps starting to underperform large caps, and hence why we are not seeing the price appreciation that we were seeing prior to mid October.  This lack of strength in the 5d-fit can only be interpreted as a precursor to weaker gains in prices, and we should be on the lookout accordingly to protecting our long investments.

One thing to look out for in the top pane is when the 5d-fit crosses the 0.00 line ... at this time, the database is losing ground in terms of price, and I'm convinced we should be aligned on the contra side.


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Thursday's events relating to Dubai rippled through the financial GGT database on Friday, causing the long-cash ratio (LCR), to drop from Wednesday's value of 0.832 to 0.626, indicating that 1822 stocks are on the long side of the recommendation list and 2912 stocks are on the cash side. 2193 stocks were long on Wednesday, and 2000 were long last Friday, so just like we're seeing price meander, we're seeing the database drift more-or-less horizontally.  The high over the last 5 days is the 2190 achieved Wednesday, and the 1822 achieved with Friday's close represents our low point.  Here's the chart regarding GGT Price and GGT LCR ...  click on it for a bigger view:



From a historical viewpoint, we are clearly on the oversold side of the LCR equation -- more stocks are below their optimized historical price and volume EMAs than not.  Despite this condition, we've certainly been lower since the March 2009 run-up; July saw us down around 0.299, and in early November we were at 0.226.  So, from our present value of 0.626, these values are possible within the current climate, especially with a potential Dubai default looming down the road in front of us.  We see that over the last few weeks prices stalled right around the GGT level of $19.60-$19.70, so we would need a significant up move and closure above these levels to see the next bull leg move. 

In order to move the LCR upward, we need increasing prices AND increasing volume across the database -- remember that the movement from CASH to LONG status requires higher prices on rising volume.  The decrease in volume over the last few weeks has not helped this situation, and correspondingly, the LCR has dropped because as prices drop, they slip down the one-way door into CASH status, only to fail to rise back into LONG status when there is no volume accompanying the appreciation in price.  Furthermore we're seeing lack of participation of the small-caps in any rally, and this is keeping many / most of the indicators on the bearish side of their values.  Hence, to really push the LCR upward, we need indicators like the R2K, the S&P400, and the S&P600 regain their leadership positions relative to the S&P100, DJ30, or NASDAQ100.

If you take your favorite software program, and plot the performance of both the IWC, which is an ETF that tracks microcap stocks, alongside IWB, which tracks largecap stocks, you'll see the following (click on the image for a larger view):



















Shown above is IWC (blue) and IWB (black) for a 3-month look-back; the same situation exists on a 1-month as well as the 6-month lookback periods.  The 1-week lookback is bad for both, with the microcap IWC getting hammered relative to the IWB with Friday's action.

My point to the above chart is that until we see leadership in the micro- and small-caps, we are not going to see huge runs to the long side with the LCR, because the large-caps are dominating, and in the equal-weighting of LCR calculations, there are fewer large caps than there are small and microcaps.  The bias is pretty clear.

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 We have an indicator which is pointing us higher from a short-term perspective.  It's called the GGT Bull-Strength indicator, and it is the ratio of (New Longs + Affirmed Longs) / (New Cash + Affirmed Cash).  The intent of this indicator is to see how many stocks meet the criteria for changing states, either from Cash to Long or Long to Cash.  When the number is large, we have an overbought condition, and when the number is small, we have an oversold condition.  Click on the image for a larger view:





Right now, according the GGT Bull-Strength indicator, we have an oversold condition:  the present value of the GGT Bull-Strength indicator is 0.0371....  To put this in perspective, we were at 0.039 on 10/28 with a GGT Price of $18.22, and the markets then moved up to $19.64 by 11/17, a total of 15 trading days later.  Folks, this was an appreciation of 7.7% in 3 weeks.  I'm not saying that this will happen again, but we need to be prepared for another move to the upside.

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Our GGT LCR Change Timer is having a hard time with life.  It moved from Long (+1) to a Long-Cash (0) state with Friday's action, and is signaling for us to get our CONTRA shopping lists ready.  It has been flipping back and forth since 11/19, simply because the markets have been going sideways.  Here's what the setup for Monday is:
  • IF the ADV/DEC lines on the major exchanges are up by 10:00 - 10:30, then there is a high likelihood that the day will be up as far as GGT is concerned.  This will cause the LCR Change Timer to stay at Long-Cash (0), effectively cocking the gun for Tuesday.  I am presently LONG, hence I will do nothing if this is the case on Monday.
  • Alternatively, if the ADV/DEC lines on the major exchanges are down by 10:00 - 10:30, then there is high likelihood that the day will be down.  This will signal us to move to cash or contras, and I will do so on MONDAY around this time frame.
Remember:  if I am long and the timer moves to Long-Cash (0) (like the present scenario), I will do NOTHING until the timer transitions to Cash (-1), which then is when I will close my longs. 

In my best Robot voice from "Lost in Space", all I can say is "Warning Will Robinson! Warning!" with my arms flailing.  Volume has been suspect, so if we have an up day, we need to see some serious movement in price AND volume, across multiple days, to signal a bull rally.  Average/stddev GGT volume is 1.39M +/- 235K shares, so let's see that or better on consecutive days to have some confidence of things moving higher.

Click on the image for a larger view; here is the GGT LCR Timer superimposed with the GGT Price.  The timer is right more than it is wrong, and is up 82% since inception in September 2008.




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The database strengths are entering over-sold territory on a global basis, and on an individual basis, it's pretty clear that we need to enter long positions.  Here's the support for this statement.



Click on the image above for a bigger view.

I haven't annotated the figure, but GGT strength is now at 0.289, and is very close to our less-than-exact-science level of 0.2 reversal area.  This is telling me that on a global view, we are positioned to reverse to the long side -- simply take a look at the levels where we have reversed in the past, and see what the LCR did at the same time.  I think this is the same situation.



The figure above compels me to enter long positions on the domestic indexes.  Friday's values slammed many of these to very low levels -- in some cases the lowest levels ever recorded since August, and as such, while we may spend a few days down here, they always rebound.

Correspondingly, here are the strengths of the major domestic indexes, and my long choices:

DJ30: fell from 0.655 to 0.3, entering a position in DDM if price is $0.05 above Friday's close.
NDX100: fell from 0.477 to 0.108, entering a position in QLD if (same)
S&P500:  fell from 0.627 to 0.108, entering a position in SSO if (same)
S&P400:  fell from 0.496 to 0.000, entering a position in MVV if (same)
S&P600:  fell from 0.439 to 0.000, entering a position in SAA if (same)
R2K: fell from 0.421 to 0.006, entering a position in UWM if (same)

I can't pass up bargains... I've always made money on this strategy, even if it was only a few points.  I'll set my stops to get me out if prices reverse after I enter.

If you are so inclined, here are my top 25 stock selections which could move into "New Long" status on Monday if the markets move higher.  Remember, you are responsible for your own investment decisions:


GENT
CXW
EVC
DRAD
LDIS
VNR
FFC
AMR
PHK
NJ
XRIT
XTEX
CFW
LDSH
SNR
STON
WHR
JHI
PFO
MDCA
NMY
CFK
BFK
GST
ASP


I'll not cover the BRICs this weekend; if you're interested, I'll include it in Monday's writeup -- simply leave me a note below.

Regards,

pgd